After 5 years of political stalemate and a mediation process led by the Southern African Development Community (SADC), presidential and legislative elections took place in Madagascar at the end of 2013. Mr. Hery Rajaonarimampianina was elected president and took office on January 25, 2014. On April 11, Roger Kolo was appointed Prime Minister with the support of 12 political parties in the National Assembly. A new Government, made of 31 Ministers and State Secretaries, has been formed.
Many international partners, who didn’t recognize the High Authority of Transition that had come to power in 2009 through unconstitutional means, have normalized their relations with Madagascar, in light of the last elections. The Government identifies the “fight against poverty through inclusive growth” as its main objective; a strategy based around 3 pillars: improved governance, economic recovery, and expansion of access to basic social services.
Growth slowed in 2013 to 2.4%, down from 3% in 2012 compared to a pre-crisis average of 5% (2004-2008). Growth in 2013 was mainly sustained by export-oriented activities in the mining sector and exports from the export processing zones. The agricultural sector contracted due to natural disasters (locust infestation and cyclones), and the tourism sector underperformed also.
Growth is projected to recover to 3% in 2014 as the agricultural sector recovers, but a large pick-up is unlikely unless investments increase from the current level of below 30% of GDP. This would require an increase in investor confidence. A natural rebound after the prolonged crisis has not taken place yet. Faster growth is necessary to make a dent in the elevated rate of extreme poverty, estimated at 82% of the population (US$1.25, PPP threshold).
Current account deficit declined to 5.6% of GDP in 2013, owing to strong exports, especially of nickel and cobalt. Imports of investment-related equipment slowed as the investment phase of a large mining project came to a close. The improvement in current account did not translate into net improvement in the overall balance of payment position, as it was accompanied by a reduction in FDI inflows, and non-repatriation of export proceeds.
International reserves declined from 3.3 months of import cover in 2012 to 2.2 months in 2013, and seem to have stabilized since. Madagascar has a floating exchange rate regime. The local currency, Ariary, has been depreciating gradually, reflecting the higher rate of inflation than its main trading partners, the euro zone and the US.
Fiscal deficit is expected to increase from 2% of GDP in 2013 to 3.5% in 2014, as the authorities depart from the extremely prudent stance and increase expenditure to take advantage of the resumption in external aid flow. The Government is planning to reorient its expenditures towards pro-poor spending, beginning with the supplementary budget for 2014, adopted in August. During the political transition, the wage bill, fuel subsidies and transfers to the state-owned electricity and water company, JIRAMA, represented the bulk of the expenditures, to the detriment of social and development spending. The authorities have declared its intention of phasing out the fuel subsidies, and of improving the financial efficiency of JIRAMA. The authorities have also resumed their efforts to mobilize more revenues with technical assistance of development partners, including the Bank and the IMF.
Madagascar ranked 155 out of 187 countries and territories in the 2014 Human Development Report. At this point, the country will not reach the UN Millennium Development Goals (MDG) by 2015. In particular, the MDGs for child mortality, primary education net enrollment and completion rates, and especially the eradication of extreme poverty, which in 2007 was deemed potentially achievable, can no longer be achieved. The country continues to rank poorly on the ease of doing business (148/189 in Doing Business 2014).
Madagascar’s economy is very fragile and its capacity to absorb further shocks is at a bare minimum. Being an open economy, Madagascar is particularly vulnerable to developments in the euro zone, to which Madagascar is particularly exposed—through 80% of its tourism earnings, 50% of its exports of goods, 15% of its foreign direct investment (FDI), and other channels.
Madagascar is also highly vulnerable to natural disasters—including cyclones, droughts and flooding. It is estimated that one quarter of the population, representing five million people, currently live in zones at high risk of natural disasters. In 2008, cyclones caused economic losses equivalent to 4% of GDP.
Last Updated: Oct 02, 2014